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Chinese Checkers with Gold Prices

By: John Browne | Thursday, April 10, 2014

For decades many of us in the hard money world have speculated that cloak
and dagger activity by large financial interests has played a large role in
determining performance in the gold market. The focus of this alleged manipulation
is believed to be in the London market, and has been widely referred to as "The
London Fix." However those who have blown the whistle have been dismissed as
alarmists, gold bugs, conspiracy theorists or worse. But recent revelations
should bring us closer to the truth.

On March 11, 2014, the Wall Street Journal reported that AIS Capital Management
had filed a class action suit, against a number of large banks including, Barclay's
PLC, Deutsche Bank, HSBC, and many others, alleging that the banks conspired
to manipulate the price of gold for their own gain. This suit comes on the
heels of official investigations in the UK and in Germany.

Like the London Inter Bank Offered [interest] Rate (LIBOR), the London Gold
price forms a benchmark for the spot price for major gold metal transactions
throughout the world. The LIBOR scandal rocked the financial world. But Germany's
senior financial regulator declared possible gold manipulation as "worse than
LIBOR". These words appeared to give new meaning to the word 'fix'. To get
at the truth, it helps to try to follow the international flows of gold, to
see who is buying, who is selling, and where the gaps may appear.

Major gold trading has long been shrouded in mystery. Despite returns required
by the IMF, trading in the Far East is difficult to trace accurately. In 2009,
China's central bank disclosed that its gold holdings had increased by 75 percent
from 600 to 1,054 tonnes, or metric tons. According to Wikipedia, this made
China the world's sixth largest holder.

Gold Field Mineral Services (GFMS) estimates the world's total gold production
for 2013 was 2,982 tonnes. With an annual production of some 428 tonnes, according
to Forbes Asia, China is the world's largest producer. But, like Russia, China
exports no gold. If China's last three years annual assumed production is aggregated,
China's 2009 declared holdings of 1054 tonnes should have increased since by
some 1,284 tonnes, for a total of some 2,338 tonnes. This would make China
one of the world's largest holders. But the story does not end there. China
imports massive amounts mainly via Hong Kong and Shanghai.

According to Forbes Asia, the China Gold Association showed that China's gold
consumption increased by 41 percent over 2012 to 1,176 tonnes in 2013. (China
does not publish official numbers so discrepancies range in the hundreds of
tonnes) Adding these imports to China's domestic production of 428 tonnes indicates
that China accumulated at least 1,604 tonnes last year. India's imports, as
reported by Bloomberg, were 978 tonnes last year. Therefore, China and India
together accumulated 2,582 tonnes or over 86 percent of total worldwide production
of 2,982 tonnes.

Furthermore, combining China's aggregate domestic production and apparent
imports indicates that she has now over 3,514 tonnes. Assuming the U.S. still
owns all the gold held by the Fed, this would make China the world's second
largest national owner.

In addition to China and India, Indonesia, Saudi Arabia and Thailand increased
their gold holdings in 2013. As gold is a widely recognized representation
of wealth, this represents a massive transfer of 'real' wealth from West to
East.

Clearly, the massive Eastern demand for physical gold has made it much more
difficult for Western central banks' mission to lower the market price of gold.
That is unless Western central banks have been leasing out gold secretly to
market buyers, who have been 'encouraged' politically, like Germany, not to
take physical delivery?

When, at the beginning of 2013, Germany asked for the repatriation of just
300 tonnes of its holdings of 3,396 tonnes, the Fed asked for a five-year delayed
delivery. By year's end, the Fed had sent Germany only 5 tonnes.

Although privately owned, partly by bankers, the Fed is audited only partially.
Could it be that a large portion of the Fed's published gold holdings of 8,133.5
tonnes is now actually the property of other nations, like Germany?

Is China already the world's largest 'owner' as opposed to 'holder' of gold?
If so, China, with a mature financial center in Hong Kong, already is further
along the path than most have predicted towards challenging the vital reserve
currency status and international credibility of the U.S. dollar.

Clearly the recent price rise in gold owes something to inflation fears, repressed
interest rates and to the Ukrainian situation. In the meantime, a growing awareness
of a possible serious and increasing shortage of physical gold and a decline
in the power of western central banks to suppress the price, point to a resumption
of the fundamental bull market in gold, despite a possible increase in fears
of recession.

John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Opinions expressed are those of the writer, and may or may not reflect those
held by Euro Pacific Capital, or its CEO, Peter Schiff.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.